Improving banking supervision in Kenya

Abstract

In view of the crucial role financial systems play in an economy, high quality regulation and supervision of the banking sector is required, for purposes of ensuring financial stability. Grant, 1993 observed that a number of weaknesses exist in banking structures in Africa, often related to the structure of the economy itself. In Asia, financial fragility has been attributed to the deliberate lack of regulation, supervision and transparency (Sinn, 2003). In a recent study to measure the level of compliance by the banking regulators of a number of African countries, inadequacies in legislative frameworks, resources, and implementation policies were noted (COMESA, 2002). This study set out to obtain an assessment of Kenya's banking supervision operations from the perspective of the 46 institutions that are under the supervisory purview of the Central Bank of Kenya. A questionnaire was designed for completion by all the institutions, with provision for recommending improvements to the supervisory and regulatory framework. The twenty-five responses received were evaluated using weighting criteria that ranked the Central Bank's oversight performance. The study revealed that, although the Central Bank of Kenya h as a fairly thorough approach to regulation of the sector, fundamental weaknesses prevail in the area of enforcing legal and prudential requirements. Some weaknesses were also noted in such procedures as evaluation of applications for new licenses, processing of various approvals, continuous assessment of institutions, and in defining prohibited business. The results are expected to provide the Central Bank of Kenya with independent perspectives on ways of improving one of its primary objectives, namely ensuring a sound and liquid banking system in Kenya. The results will also be useful for future comparative studies on relative performance among peer regulators in developing countries.